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Market Structures and Market Equilibrium

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1. Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are:

QS = 2P - 20 (Supply)

QD = 80 - 2P (Demand)

Where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.

A. Algebraically determine the market equilibrium price/output combination.

B. Use a graph to confirm your answer.

For the graph, use prices: 10, 20,30,40,50,60,70,80,90 and Quantities:5,10,15,20,25,30,35,40,45,50,55,60,65

2. The figure below shows a firm in a perfectly competitive market:

a. Find the price below which the firm will go out of business.

b. What is the firm's long run supply curve?

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Solution Summary

The solution to the first problem depicts the steps to find out equilibrium price and quantity algebraically and graphically. The solution to the second problem discusses the price below which a firm will prefer to shut down.

Solution Preview

Please refer attached file for missing graphs.

1.
A. Algebraically determine the market equilibrium price/output combination.
For equilibrium, Put QD=QS
80-2P=2P-20
4P=100
P=25

QD (at P=25)=80-2*25=30
QS(at P=25)=2*25-20=30

Equilibrium Price =$25 per hour
Equilibrium Quantity=30 thousands of hours of floor reconditioning per month.

B. Use a graph to ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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